The Justice Department is investigating Standard Chartered PLC
over allegations that an Indonesian power company controlled by the
London-based bank paid bribes to win contracts.
An internal audit at Maxpower Group Pte. Ltd., a power-plant
builder in Southeast Asia, found evidence of possible bribery and
other misconduct, findings that were echoed in a separate review by
a law firm hired by Maxpower, according to copies of those reports
reviewed by The Wall Street Journal. U.S. prosecutors are looking
into whether Standard Chartered is culpable for not stopping the
alleged misconduct, people with knowledge of the investigation
said.
Maxpower's chief executive worked at Standard Chartered until
last year, and the bank holds three seats on the power company's
board.
The investigation compounds the legal concerns of the
Asia-focused bank and its chief executive, Bill Winters, who was
hired last year to clean up the bank's balance sheet, governance
and culture. The bank struck a deferred-prosecution agreement with
the Justice Department in 2012 over alleged Iranian sanctions
breaches, under which it could be prosecuted if it commits a
federal crime. It admitted wrongdoing and has tripled spending on
compliance.
Standard Chartered is one of the world's biggest banks for
financing global trade, and it is dependent on access to the U.S.
financial system. Its private-equity unit profited for years by
investing directly in Asian companies, but now is facing
underperforming commodities investments and higher costs from
regulation. The unit lost $167 million in this year's first half
and Standard Chartered is considering ways to exit the business,
people familiar with the plans said.
Standard Chartered bought a stake in Maxpower in 2012 and became
majority shareholder last year through a cash infusion of $60
million, bringing its total investment to $143 million. It holds
some of those shares on behalf of co-investors.
The Justice Department probe is focusing on whether U.S.
anticorruption rules were broken when Maxpower executives allegedly
facilitated bribes to win power contracts and smooth relations with
Indonesian energy officials, according to the people with knowledge
of the investigation. The Justice Department is investigating
whether Standard Chartered executives on the Maxpower board knew
about or approved alleged bribes, and if the bank's controls around
its investment in Maxpower were adequate, these people said.
Standard Chartered said it "proactively referred this matter to
the appropriate authorities and have conducted our own review."
Maxpower said it is working with "professional advisory firms to
fully investigate," and it has enhanced internal controls and
shaken up management since the audit. A Justice Department
spokesman declined to comment.
The internal audit at Maxpower last year indicated that more
than $750,000 in outstanding cash advances in 2014 and early 2015
needed to be examined as possible bribes, according to the copy
reviewed by the Journal. In December, lawyers at Sidley Austin LLP
hired to review the audit found what they described as strong
indications that Maxpower employees made inappropriate payments to
Indonesian government officials and others from at least 2012 to
late 2015, often to get power contracts in Indonesia and sometimes
just to get paid on time, according to the review. It found that
some of the payments were funded by cash advances requested by
three founders and two employees.
The head of the Justice Department's Foreign Corrupt Practices
Act unit reached out to Maxpower's lawyers to ask about the bribery
allegations, according to the review. News of the allegations was
reported earlier this year by MLex, a global-regulatory-risk news
service.
Maxpower's founders either declined to comment or didn't respond
to requests. Maxpower terminated their employment last year, which
it described as part of an effort to address compliance
matters.
The Foreign Corrupt Practices Act prohibits U.S. companies or
those doing business in the U.S. from making payments or giving
gifts to foreign officials in exchange for business, whether
directly or through intermediaries. Violators can face both
criminal and civil penalties.
Maxpower is facing lower-than-expected demand for its power
plants, and is seeking to restructure more than $180 million in
loans, people with knowledge of the matter said.
Greg Karpinski, an American who was co-head of energy, resources
and infrastructure in Standard Chartered's principal-finance
business, became Maxpower's CEO in June 2015. Not long after, he
and six then-members of Maxpower's board met at a wine bar in a
downtown Jakarta mall, according to the legal review. The
discussions turned to how to continue making illicit payments,
according to the legal review and a recording of the conversation
heard by The Journal. One participant on the recording jokingly
suggested handing out soccer balls stuffed with cash to government
officials.
Another person is heard on the recording saying the company
would stop making payments for the purposes of getting partners to
pay their bills, but kept open the possibility to continue paying
to get contract extensions.
"I kind of feel like extensions are really critical stuff, we
use an adviser. But for like getting paid on a regular basis, f—
it. Enough is enough," this person said. "We'll find some other
way. I mean, take them to karaoke, take them golfing, take them to
Singapore, I don't care."
The law firm in its review said it believed "this was
surreptitiously recorded" by one of the founders. Mr. Karpinski
declined to comment.
The company says it "believes the allegations and attributions
provide a one-sided and partial view of the operations and events
at Maxpower."
Standard Chartered has disclosed at least some of the allegedly
inappropriate payments to the Justice Department, the Bank of
England and the Monetary Authority of Singapore, according to
people familiar with the matter. The Bank of England and Monetary
Authority of Singapore declined to comment.
The Standard Chartered executives who sat on the board of
Maxpower as of August were Nainesh Jaisingh, Kanad Virk and
Benjamin Soemartopo. Mr. Virk left the bank in August and didn't
respond to requests for comment. Mr. Soemartopo said his job will
end in November because of downsizing, not because of Maxpower. Mr.
Jaisingh, the only one of the three who wasn't present at the
wine-bar meeting, remains at the bank. He declined to comment.
Mr. Karpinski took over at Maxpower weeks before the internal
audit was completed. He shook up management and took steps to cease
abuse of the cash-advance system, according to disclosures made to
lenders.
In the legal review that followed the audit, lawyers said
inappropriate payments continued until at least last October 2015.
They also flagged as "a cause for concern" the recording of the
wine-bar discussion.
At the same time, Standard Chartered was dealing with the
fallout of a decade of overexpansion in Asia. Mr. Winters, a former
J.P. Morgan Chase & Co. executive, joined as CEO in June 2015
with a pledge to simplify the bank.
He started scaling back businesses that were unprofitable or
hobbled by higher-capital requirements, and the principal finance
division was an obvious target, people familiar with the matter
said. Joe Stevens, the unit's head, is exploring a management
buyout with other team members, these people said.
(END) Dow Jones Newswires
September 27, 2016 08:55 ET (12:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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